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Conor Svensson

Published On - November 3, 2022

Retail CBDCs: Debunking Privacy Concerns

In my last issue, I debunked why concerns of privacy campaigners over CBDCs should not be of concern with respect to wholesale financial markets. I now shift the focus to retail digital currencies, which is where much of the anti-CBDC rhetoric is aimed. The concern that proponents of decentralised cryptocurrencies have is that were we to have a central bank issue a digital currency for retail users, it could be controlled by the state in a way that cash cannot be currently. 

What is a retail CBDC and how do they work?

Retail Central Bank Digital Currencies (CBDCs) are digital representations of a country's official currency, issued and regulated by the central bank. These digital currencies are designed for use by the general public and are meant to complement physical cash rather than replace it entirely. It's important to note that a retail CBDC would be considered e-cash — much like cash today, its supply is controlled by the central bank who guarantees its face value, and the user can use it as they see fit.
This is different to e-money which is a digital representation of real money but only exists on account with an institution that holds it on your behalf, such as the funds you hold in Paypal. You cannot send this money to someone outside of the Paypal ecosystem. 
This is also different to stablecoins such as USDC which are in no way guaranteed by a central bank, they are backed by the company that issues them, Circle in the case of USDC. USDC only remains solvent as long as Circle is still in business. This is unlike a retail CBDC which would be backed by a central bank. 
Key things to know about how they work: 
  • Issuance and Regulation: Retail CBDCs are issued and regulated by the central bank of a country. Unlike cryptocurrencies like Bitcoin, retail CBDCs are fully backed by the central bank and carry the same value as the traditional fiat currency.
  • Accessibility: Retail CBDCs are designed to be accessible to the general public. Citizens can open digital wallets or accounts with authorized financial institutions to hold and transact in retail CBDCs.
  • Transactions: Retail CBDC transactions can be conducted using mobile apps, digital wallets, or other digital payment platforms. Users can make payments, transfers, and purchases with retail CBDCs, just like they would with physical cash or existing digital payment methods.
  • Privacy and Security: Central banks are tasked with ensuring the security and privacy of retail CBDC transactions. These digital currencies are designed with robust security features to protect against fraud and cyber threats. Importantly, central banks must strike a balance between user privacy and regulatory oversight.
  • Interoperability: Retail CBDCs should ideally be interoperable with existing payment systems and methods, allowing for seamless integration into the broader financial ecosystem.

Retail CBDC concerns

If a retail CBDC were created in a tokenised form, campaigners have raised concers that the state would be able to exert too much control over how such a currency is used. As demonstrated by the anti-CBDC posters below, one could not just track where and how you're spending your funds, but also apply stealth taxes too. 
 Man depicting the ills of CBDCs
This approach would require the roll-out of a retail CBDC managed by the central bank, where all consumer transactions take place on-chain. Such a platform would be far from trivial to do and change the role of many of the existing financial platforms we use today. It also arguably wouldn't be different to what we have today, except that your financial activities would be in a single place instead of spread between multiple institutions. For a breakdown of different approaches, I encourage you to refer to the report on project Aurum undertaken by the BIS Innovation Hub and the Hong Kong Monetary Authority. 
We already have multiple platforms and providers handling consumer transactions at point of sale and online, be that Paypal, Visa, Mastercard, Square, Stripe and others. In addition, your bank and credit card company is tracking your activities and knows what you are up to financially. Replacing or migrating such payment infrastructures with a centrally managed retail CBDC would require a massive upheaval, and also make little sense for governments given how well these platforms work. Hence they would likely be responsible for plumbing into retail CBDCs, and draconian point-of-sale measures would likely be highly challenging to implement any time soon. 
These platforms are already tracking every activity you undertake on them, they will disclose this information to the government if they need to, and they can also lock you out of their platforms should they see fit.
A retail CBDC may aggregate such information into one place, but it is not worse for the user than what we have now. 
Privacy is also a commonly cited concern with respect to retail CBDCs. Even the Bank of International Settlements acknowledges the importance of privacy for consumers — it should not be public information what groceries you purchase each week, and central bankers know this is not an option but essential
With our existing monetary systems, privacy is controlled by financial institutions, not individuals. With a retail CBDC, you would likely have a far greater grasp of how your privacy is protected than what you have currently where you're at the mercy of an endless number of different platforms, some of which you've likely already seen. Such as one of the many platform breaches that have resulted in sensitive data about your online activity or identity being stolen. 
Other concerns include: 
  • Digital Divide: Not all citizens may have access to the technology required to use retail CBDCs. This could exacerbate financial exclusion if not properly addressed.
  • Monetary Policy: Retail CBDCs could impact the effectiveness of traditional monetary policy tools. Central banks would need to adapt their strategies to account for the digital currency's influence on money supply and interest rates.
  • Cybersecurity Risks: Digital currencies are vulnerable to cyberattacks, and the central bank must continuously update security protocols to protect against potential breaches.
Whilst it is speculative to outline the final form of a retail CBDC, I think it's fair to say that many of the criticisms against them are unfair — our digital lives can already be closely monitored and this trend will continue regardless if we have CBDCs. 
For those who remain firmly against them, cryptocurrencies will likely remain the most viable alternatives. They are unlikely to be outlawed in most jurisdictions. However, the hoops that are required to jump through to be fully anonymous are significant. However, it is important that any anti-CBDC views are framed correctly. Just because we have decentralised networks powering cryptocurrencies, DeFi and other innovations, doesn't mean that all future currencies should migrate to this model. 
After all, the stabilising assets of the crypto ecosystem are those stablecoins which rely on U.S. dollars to underpin them. Without these, cryptocurrency markets would likely not have been able to flourish to the level that they have. 
To have safer cryptocurrency markets, we need to have not just stablecoins which are stable by name (but not always in nature) but coins that are stable in name and nature, and for that retail CDBCs will need to co-exist and play nicely with the crypto and web3 ecosystems. 
Yes, there will be a need to compromise with these, as states do not transcend borders as a decentralised network can. However, it's important to keep in mind that for the majority of the population creating a frictionless experience between our different monetary platforms will be the biggest benefit of all, and CBDCs are one component that can help us get there. 
Digital Currency